Standing Committee A

[Mr. Edward O'Harain the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984.)

Andrew Selous: On a point of order, Mr. O’Hara. I have spoken to some of the members of the public who listened to our deliberations this morning. They have told me that in these long Committee rooms, it is quite difficultfor them to hear. I wonder whether through you,Mr. O’Hara, the Committee would agree to allow them to move to the end of the first gangway, so that they could hear us a bit better.

Edward O'Hara: That seems a reasonable request. We could move the notional bar forward to just beyond the table, and perhaps arrange next week to have a physical bar. If there are no objections to that, I invite members of the public to move forward.

Clause 2

Tobacco products duty: evasion

Amendment proposed [this day]: No. 10, in page 2, line 13 [Vol I], after ‘who', insert
‘on a balance of probabilities'.—[Mr. Goodman.]

Question again proposed, That the amendment be made.

Edward O'Hara: I remind the Committee thatwith this we are discussing the following amendments: No. 11, in page 2, line 16 [Vol I], after ‘likely', insert
‘on a balance of probabilities'.
No. 12, in page 2, line 28 [Vol I], after ‘subsection (1)', insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 13, in page 2, line 30 [Vol I], at end insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 14, in page 3, line 2 [Vol I], after ‘specified', insert ‘and reasonable'.
No. 15, in page 3, line 28 [Vol I], after ‘may', insert
‘after seeking to establish the facts of the case with the manufacturer'.
No. 16, in page 4, line 17 [Vol I], after ‘state', insert ‘fully'.
No. 17, in page 4, line 27 [Vol I], at end insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 18, in page 4, line 28 [Vol I], at end insert
‘unless that manufacturer has previously agreed a memorandum of understanding with Her Majesty's Revenue and Customs.'.
No. 19, in page 4, line 46 [Vol I], leave out from ‘notice' to end of line 2 on page 5.
No. 20, in page 5, line 4 [Vol I], leave out
‘(or are taken to have confirmed it)'.
No. 21, in page 5, line 43 [Vol I], after ‘may', insert
‘after consulting the Commissioners, manufacturers and other interested parties'.

Philip Dunne: Mr. O’Hara, I thank you for calling me after the intermission. I am particularly grateful for the point of order, too, because it has given the hon. Member for Wirral, West (Stephen Hesford) time to take his place. I was in mid-sentence and using his intervention in the previous sitting to illustrate not the point that he was trying to make but the reverse. If I interpreted his remarks correctly, he suggested that it would be possible to identify whether foreign-based manufacturers were likely to be selling to customers who might smuggle cigarettes or tobacco products into this country. The nature of the local market would indicate in itself whether the sale was of sufficient scale for the market to be prone to smuggling.
Some nations are small but active traders. This country has established most of its economic heritage on the back of trading with other larger and smaller nations. From my own experience, I know for example that the market of Hong Kong, with 6.5 million residents, is an entrepot to the market of greater China, with its more than 1 billion inhabitants.
I should be interested in whether the hon. Gentleman’s test was relevant to a customer of a tobacco-importing business in Hong Kong determining whether smuggling into this country was likely. I venture to suggest that it is an irrelevant test. The point remains, however, that the thrust of the clause is directed at UK-based manufacturers, rather than foreign manufacturers where the bulk of smuggled goods comes from.

Stephen Hesford: The hon. Gentleman amazes me, because the test that I set out in a few words is the one that is included in the Bill and to which I referred his hon. Friend the Member for Braintree (Mr. Newmark).

Philip Dunne: I am grateful for that observation, but my point remains perfectly valid. It will be down to the measures that the Government impose on foreign-based manufacturers to prove that the manufacturers are not likely to be smuggling. That will be a difficult test for the Government to establish in the absence of the greater use of measures such as the memorandums of understanding with those individual manufacturers
In relation to the stand part debate, why are the Government seeking to use such measures to combat smuggling when they are not using the full forceof existing laws to combat smuggling in our constituencies? I accept that this is a Finance Bill, and that I may be referring to an example that strays beyond its confines, but if you will indulge me,Mr. O’Hara, I want to point out that we suffer from a particular problem in my constituency—the blight of the car boot sale. I am sure that the hon. Member for Wolverhampton, South-West (Rob Marris) will nod his assent that it affects the area between our constituencies. Several operators use the very limit of the law to provide car boot sale facilities for many of his constituents, and mine. On the rare occasions that they are raided by the police, significant quantities of contraband goods—such as tobacco products, CDs and other goods—are found in large numbers. If effort was expended by this Government on cracking down on venues for the sale of illegal goods, they would find that smuggling rates would decline more rapidly than will be the case under this measure.

Stephen Hesford: With respect, the hon. Gentleman was wrong about his last point, but this point is even more confusing. Is it his policy and that of the Conservative party to prohibit car boot sales?

Philip Dunne: I shall not indulge your good nature,Mr. O’Hara, by requesting that you allow me to respond in too much detail to the hon. Gentleman.

Edward O'Hara: It would help because I would rule you out of order anyway.

Philip Dunne: I simply say that I do not believe that my first point was incorrect. It was valid, and I look forward to the Financial Secretary’s response to it. I am certainly not arguing that we should stop car boot sales. I am arguing that the legislation that exists to deal with what is sold at car boot sales should be enforced.

David Gauke: It is difficult to argue the case that the clause is unduly harsh on the tobacco industry because that is not the most sympathetic of causes. We will not often see senior politicians in open-necked shirts visiting cigarette factories, saying what a marvellous job they are doing for the British economy. Along with nearly all my colleagues, I am a non-smoker. It is certainly true that the lawyers here outnumber the smokers, on these Benches at least. It is not very often that the tobacco industry is treated particularly sympathetically by politicians. The only instance I can think of in recent years was in 1997 when Formula 1 was exempted from the ban on tobacco advertising, but we know that particular circumstances were involved in that case.
My hon. Friend the Member for Rugby and Kenilworth (Jeremy Wright) made several good points about the difficulties that exist in the clause. It is worth dwelling on them, not so much from the point of view of the tobacco industry, but from the Government’s point of view and that of Her Majesty’s Revenue and Customs. There are one or two circumstances where there must be some concern as to whether everything in the clause will be enforceable.
My hon. Friend raised the point earlier regarding the degree of uncertainty that must exist when determining the intention of the purchaser of the cigarettes. It is difficult to test the intention of that individual or that entity: in some circumstances it may be clear, but in others it will not be. Therefore, there is a fundamental uncertainty in the law. One questions whether the provisions might be vulnerable to a challenge under human rights legislation, and I would be interested to hear the Financial Secretary’s views on that point.
A second area of potential concern relates to the£5 million fine. The procedures set out in clause 2 are more of an administrative nature than a criminal one, and there may be concerns that problems will exist under human rights legislation as a consequence.
I am also slightly concerned about the broader issue of the way in which the Government increasingly use private businesses to perform the role of policeman. There may be a good reason for doing it. A private business, such as the tobacco industry, may be in a stronger position to regulate smuggling than the law enforcement authorities. However, that increasingly places great regulatory burdens upon private business, and has one or two other potential dangers. The police are democratically accountable, although not as democratically accountable as some of us would like, but none the less an accountability mechanism exists. However, no such mechanism exists for a business in the way that it enforces rules.
The hon. Member for Wolverhampton, South-West also raised the issue of judicial review in a different context, and public bodies are liable for judicial review. There is a different mechanism and a well established, sophisticated way with which law enforcement and public authorities are dealt. We are passing on public duties to private companies, which can cause problems. 
Looking at the clause earlier, I was reminded of the provision on money laundering under the Proceeds of Crime Act 2002, an area of law that I once knew somewhat better than the law on tobacco smuggling. I refer, in particular, to the imposition of a reporting regime for the regulated sector. There is a different approach to money laundering than is applied to tobacco smuggling under clause 2, which says that the businesses must avoid dealing with potential smugglers. 
The approach proposes a positive obligation on tobacco firms because, in doing so, they have to draw up a policy and investigate the potential counter parties. It is more than simply avoiding matters; it is a positive duty. I am not complaining about that. However, it does cause difficulties. Within the money laundering regime, if the private business is suspicious, it does not have to be judge and jury about whether the entity or transaction that it is dealing with involves money laundering. The private business must follow the rule and report the matter to the authorities.
As for tobacco smuggling, rather than the potential difficulties involved with imposing a duty toavoid entering into certain transactions, has any consideration been given to whether the problem should be looked at on the basis of reporting? The memorandum of understanding might already contain details of the reporting obligations, but could the Government consider beefing them up? That may prove to be a more satisfactory way for tobacco companies to deal with the matter.
It seems reasonable to say to a tobacco company, “You should have suspicions in these particular circumstances. You are entering into a transaction and you should inform us, the law enforcement authorities.” It should then be for the law enforcement authorities to pursue the matter, rather than for the tobacco industry to say, “We have to decide. We may have some guidance, but we are not really in a position to make a judgment”.
There may already be some provision on how reporting works that I am unaware of. However, I wonder whether clause 2 is going down the wrong route. Given the considerable uncertainty that exists within the current provision, it may be difficult for tobacco firms to comply with the clause. For example, they may face difficulties at a human rights law level and, therefore, the Government should establish a reporting, rather than an avoiding, regime.

Brooks Newmark: I shall be brief because I can tell from the looks of those onthe Government Front Bench that they are anxiousto proceed. I thank the hon. Member for Wolverhampton, South-West, who taught me, almost a year ago in my first debate on the Finance Bill, the wonders of explanatory notes.
I was intrigued when my right hon. Friend the Member for North-West Hampshire (Sir George Young) pointed out that there were annual revenue losses of £2.9 billion, which an extraordinarily large figure. In note 31 of the explanatory notes to clause 2, there is mention of a package of measures to reinforce the tackling tobacco smuggling strategy. There is a lot of conversation about cigarettes, and we read in the notes that it is estimated that one in six cigarettesis smuggled, which is an extremely high number. However, what really struck me was that half of all hand-rolling tobacco for roll-your-owns is actually illicit. That is an extremely high figure. I would like to draw out from the Financial Secretary which of the measures referred to in note 31 focus particularly on the smuggling of hand-rolling tobacco, because that figure of 50 per cent. seems extraordinarily high. I look forward to his response.

Paul Goodman: You,Mr. O’Hara, and the Financial Secretary were absolutely right to say this morning that our consideration of this issue has been curious in thatour debate on the amendments has preceded a stand part debate on the substance of the clause. However, our debate on the amendments had in part to address the substance. Following your advice, Mr. O’Hara, I propose to speak to clause stand part. The Financial Secretary will then respond, and then I will make it clear whether we intend to press our amendments to a Division. I welcome the hon. Member for Falmouth and Camborne (Julia Goldsworthy) to the Committee, because we did not have the chance to do that this morning, although the Paymaster General welcomed her in absentia.
Before I turn to clause stand part, I point out that—as the Committee has already heard, and as my hon. Friends have already all made clear when touching on points of real substance—these are important and controversial clauses. This morning, I listed the Chartered Institute of Taxation, the Institute of Chartered Accountants and the Institute of Directors, all of which have concerns about the measures. In fact, in the break between the morning and afternoon sittings, I found among my e-mails a further briefing from the Law Society that was not present when I left for Committee this morning.
The Financial Secretary made the point that all those bodies are involved directly with taxation and are not tobacco manufacturers, and I make two brief points in response to that. First, obviously, it does not follow that their concerns are mistaken—nor did he suggest that. Secondly, tobacco manufacturers have privately related concerns about some of the provisions to me, although I say plainly to the Financial Secretary that there have not been as many from those manufacturers as from the other bodies.
The concerns basically fall into four parts. First, the organisations are concerned that the proposals may be unnecessary in that they appear to duplicate existing information-gathering powers, money-laundering rules and parts of criminal law relating to aiding and abetting and conspiracy. You will already see,Mr. O’Hara, that this debate is another paradise for lawyers. Secondly, the organisations are concerned that the proposals may be ineffective in that they appear—certainly in the view of the Chartered Institute of Taxation—to contravene EU treaties and the European convention on human rights, a point that my hon. Friends referred to earlier. Thirdly, in so far as the measures are necessary and effective, they are none the less excessively subjective. Fourthly, they createa disproportionate administrative burden on manufacturers and break new ground in obliging businesses to take active steps to help to police the criminal laws intended to prevent tax loss—a point made by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) a moment ago. However, there is no legal duty on citizens actively to enforce laws against crimes that are no less serious, such as crimes that cause death or injury, or theft of private property. Let me deal with each of those points in turn.
First, there is the question of whether the proposals are necessary. There are already measures in civil law under the law of tort in England and delict law in Scotland that would allow the HMRC to recover any damages arising from the fact that a business had acted recklessly and as a result allowed a person to escape duty. There are also laws such as the Customs and Excise Management Act 1979 and the Tobacco Products Duty Act 1979 that already apply to those sections of the Government’s proposals that require information about importation or exportation. Therefore, I ask the Financial Secretary to explain what parts of the proposals are not already covered by those Acts. It is the opinion of some bodies that have commented on the proposals that they are in part already covered in law.
Secondly, there is the question of whether the proposals will be effective, particularly in respect of EU law. That concern is shared by the Institute of Chartered Accountants. Although excise duties are not subject to harmonisation measures such as those found in EU directives, they are still subject to EU VAT law in the context of the right to freedom of establishment. The proposals may concern transactions between UK businesses and businesses carrying on a trade in a country other than an EU country, a point alluded to by my hon. Friend the Member for Ludlow(Mr. Dunne). The proposals therefore may affect intra-community trade.
EU law does not prevent member states from taking action to prevent fraud and evasion, but limits have emerged from case law on what can be done to prevent fraud. In representations made to me, the recent Optigen case has been cited. It saw Optigen Ltd pitted against Customs and Excise commissioners. Even though I am not a lawyer, I have some apprehension of the principle of proportionality, which is the key legal principle involved, as it has been imported into law in recent years. In the view of the Chartered Institute of Taxation, the measures taken are disproportionate to the aim intended to be achieved because the size of the penalty exigible for non-compliance, which proposed new subsection 7C(2) sets at a maximum of£5 million—a considerable penalty, which my hon. Friend the Member for Rugby and Kenilworth referred to earlier—is, in the institute’s view,
“on such a scale as to be criminal in nature. It is questionable whether it is right for the tax legislation to convert a supposedly civil offence into the equivalent of...aiding and abetting a crime. Accordingly, it is improper to allow such a penalty to be imposed by what is in effect an administrative decision.
The penalty is exacerbated because, to the extent that a business is required to avoid carrying out transactions likely to result in smuggling, it is required to curtail its business with a consequential loss of profits. While this may be justified where smuggling is almost inevitable it will, because of the subjective nature of the decision to be made, lead to transactions declined even though no fraud is involved.”
I take it that that is a reference to what could happen if a firm is involved in legitimate activity but also in activity that may subsequently be judged to be illegitimate. There could be an effect on the legitimate business of the firm.
The institute continues:
“There would appear to be potential conflicts with other law e.g. a transaction might be potentially reportable under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003 since a money launderer might seek to use legitimate transactions such as an ordinary sale of goods to launder money. In such cases, a business could be faced with the dilemma that confirming a transaction is contrary to the TPDA 1979, but not doing so might amount to ‘tipping off’—a rather more serious offence.”
The institute adds:
“It is also necessary to bear in mind the difference in the levels of knowledge which a business might have”—
that touches on another point raised earlier—
“and which the tax authorities—who have access to a wider range of information—may have. The judgment of HMRC might therefore be different to that of a business, yet it is HMRC...who will decide whether”—
to quote proposed new section 7B(1) of the Tobacco Products Duty Act 1979—
“they ‘think that a manufacturer has without reasonable excuse failed to comply’. It is difficult to conceive of how a tax officer deeply involved in countering tax fraud can place himself in the shoes of the business to decide whether there is compliance or not. Moreover HMRC will be operating with the benefit of hindsight, whereas the tobacco manufacturer will not have that advantage.”
What legal advice has the Financial Secretary received on the matter of subjectivity?
Fourthly, there is the question of the administrative burden that the proposals will place on manufacturers. Does the Financial Secretary share the view of the Institute of Chartered Accountants that unless tobacco manufacturers are content with the wording of the clause, it risks being subject to lengthy litigationin the UK and at the European Court of Justice?What legal advice has he taken, particularly on proportionality and the relation between the proposals in the Bill, the recent Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003?
The Institute of Chartered Accountants points out that clause 2 has territorial problems—which relates to the point made by my hon. Friend the Member for Ludlow—that the HMRC might be open to claims for damages and that there seems to be no adequate provision for independent review of the HMRC’s actions. What assessment has the Financial Secretary made of any new vulnerability in the HMRC to claims for damages? Can he guarantee that any review carried out by the HMRC under section 7C(3) will be carried out by someone other than the officer who authorised the report? That goes back to another point made this morning by my hon. Friend the Member for Rugby and Kenilworth.
Finally, given that the new proposals seek to place new duties on tobacco manufacturers, I am curiousto know the Government’s further thinking on the matter. Are they considering extending those duties to manufacturers of other products vulnerable to fraud, such as alcohol?

John Healey: I shall deal first with the series ofpoints made by the hon. Member for Wycombe(Mr. Goodman), and then try to answer the points made by other hon. Members.
The hon. Gentleman asked me whether the Government had taken legal advice on a series of matters before framing the clause. The short answer is yes. The slightly longer answer is, “Of course we have.” We have taken advice on the questions of proportionality and compatibility with European Union legislation. We have also taken advice on the question whether other laws would give us powers to control supplies of tobacco. Our judgment and knowledge is that such laws do not exist.
The hon. Gentleman asked about HMRC review. HMRC practice on any regime for which it is responsible is that the review of a taxpayer is conducted by HMRC officers independent of those who are involved in pursuing that taxpayer or, in this case, undertaking the clause 2 process.
The right hon. Member for North-West Hampshire (Sir George Young) asked about the impact ofclause 2, and about its benefit to the Treasury. The clause is based on and complements the memorandums of agreement that are currently in place with the three major UK-based tobacco companies, which supply the majority of the UK market. The memorandums of understanding, reinforced by the clause, will make it harder for smugglers to source large quantities of cigarettes and of hand-rolling tobacco for the purposes of smuggling and selling within the UK.
The existing memorandums of understanding have resulted in a significant fall in the proportion of genuine manufactured tobacco in cigarettes that have been seized by HMRC. Because the supply of genuine tobacco is being choked off, it has been replacedby counterfeit tobacco. In 2001-02, 85 per cent. of cigarettes seized were genuine—albeit diverted, rerouted or smuggled in some way—but by 2004-05, the proportion was about a half. In other words, legitimate sources have been choked off at theirorigin by arrangements and close co-operation with manufacturers. Smugglers have therefore had to adapt their techniques and have increasingly used counterfeits as their source.
It was the pre-Budget report that originally set out the impact on combined revenue of clause 2, together with the measures and new initiatives that were set out in “Reinforcing the Tackling Tobacco Smuggling Strategy”, the document published alongside the Budget. The report indicated that there would be positive impact of £50 million this year, £90 million in 2007-08 and £115 million in 2008-09. If the hon. Member for Braintree wants to see our other proposed measures, including those in relation to hand-rolling tobacco, he should consult chapter 5 of the pre-Budget report and the document that we published alongside the Budget in March.

Stewart Hosie: The Financial Secretary said that the purpose of the clause is to choke off the supply of large quantities of cigarettes and hand-rolling tobacco to smugglers. That is perfectly reasonable, but the lobby notes also saythat clause 2 imposes a duty on tobacco manufacturers not to facilitate smuggling, and that tobacco manufacturers will be required to avoid supplying cigarettes or hand-rolling tobacco to those likely to resupply to those likely to smuggle. Do tobacco and cigarette companies have the necessary due diligence skills to determine whether potential resupplying companies may be functioning legally in their place of operation?

John Healey: The short answer is that the memorandums of understanding already contain a commitment on precisely that point and the tobacco companies, working with HMRC, are increasingly able to do that.
The hon. Member for Rugby and Kenilworth asked about the burdens that would be placed on manufacturers. There should not be any significant additional costs to tobacco manufacturers that have already put agreed memorandums of understanding in place, because the clause mirrors those existing working arrangements. In meetings with HMRC, some tobacco manufacturers have indicated that they may incur some additional costs, because they intend to inspect all seizures that are notified by HMRC intelligence communications. They have not tabled any estimates, nor have they put forward any objections on grounds of cost during the formative stages of the clause.
The hon. Gentleman then argued that the provisions needed to be clearer and more specific. He referred, in particular, to the limits that the manufacturers may be able to exert on the supply chain when they have sold to the principal primary customer. We accept that there is a limit to what manufacturers can do to control the supplies beyond that first customer, but there have been instances when the volume of tobacco supplied to certain markets has significantly exceeded the legitimate demand in those markets, including even the permissible requirements of the travelling customers. As I said, manufacturers can encourage their customers to adapt their supply chains and are doing so in some cases. They can contractually oblige their customers to adapt their supply chain policies and similarly are beginning to do so in some cases.
We shall set out more clearly some of the expectations and requirements in the regulations and guidance that we are producing. We will do so not under primary legislation, in order to give ourselves greater flexibility. It will benefit the industry and ourselves to be able to change the provisions should that be required without primary legislation in the future. That is especially important in the area of smuggling, where the methods, tactics and routes change rapidly.
My hon. Friend the Member for Wolverhampton, South-West traded on his lawyerly background by urging more elegance in the drafting. Size of supply is the terminology that we tend to use in the memorandum of understanding. We have tried to mirror the clause on the memorandum of understanding. Manufacturers are used to it; they understand it. It is a sensible approach. The Government’s lawyers are satisfied and content that the terminology covers the purpose for which the provision is designed. The nature of supply is broad. It is intended to include such issues as unusual or convoluted transit routes, large cash payments and changes in buying patterns that may warrant further investigation.
The hon. Member for Ludlow referred to car boot sales. It is part of the operational pattern and strategy of HMRC to tackle the illicit supply of goods, whether at car boot sales, car parks, pubs or clubs. If the hon. Gentleman is coming across car boot sales in his constituency where such activity takes place, I encourage him to ring the Customs confidential hotline on 0800 595 000. In order to tackle the supply of smuggled hand-rolling tobacco and cigarettes, it is necessary to intervene and clamp down at each stage of the supply chain. That is precisely what HMRC does. It has about 2,000 operational staff who are deployed as front-line officers at the borders and inland to intercept and deal with the supply routes. If the hon. Gentleman consults the Budget document that we published, he will see that an extra 200 people will be deployed this year specifically to step up our efforts to deal with hand-rolling tobacco.
I say to the hon. Member for South-West Hertfordshire that the reason why it is hard to argue that such provisions are unduly harsh on United Kingdom tobacco manufacturers is that they are not arguing that themselves. As I said earlier, they may not like the clause, but they accept that it builds on what we have done already on a voluntary basis and that it will make a further contribution to choke off and reduce the supply of legitimate tobacco and cigarettes to the smuggled market.
I hope that I have dealt with the questions asked about the consistency with human rights legislation. For the hon. Gentleman’s information, the Chancellor signs the human rights statement in respect of the Finance Bill. I have signed the regulatory impact assessment that relates to the provisions as being compatible with human rights legislation, so if serious questions arise, it is I in the first instance who will have to answer for the judgment that I have already made. In making that judgment, we take on board careful and comprehensive advice from the lawyers, and in respect of what the hon. Member for Wycombe is concerned about, we are confident that the provisions of the clause are compatible. On that basis, I hope that the hon. Gentleman will withdraw his amendment, and that the Committee will agree to clause 2 standing part of the Bill.

Paul Goodman: It became evident in earlier exchanges between the Financial Secretary and me that these amendments were intended to be probing amendments. The Financial Secretary dealt satisfactorily with many of the points that were raised. For example, he made it clear that “likely” means
“on a balance of probabilities”,
and that has saved the hon. Member for Wolverhampton, South-West and I from being locked together in some Dantean circle arguing over the matter indefinitely. Also, in relation to amendment No. 16 and the word “state”, the Financial Secretary made it clear that there is no need to insert the word “fully” because “state” implies “fully”.
However, there is one specific concern arising from the Financial Secretary’s response that we may wish to raise later. He probably will not be surprised to hear that it is in relation to the memorandums of understanding. The Financial Secretary said thathe did not want to give an undertaking that manufacturers who enter into memorandums of understanding will receive any different treatment in the Bill from any other manufacturer who has them first because he wanted a level playing field—he wanted equality of treatment for all. He then explained that there is a process in respect of the signing of these undertakings.

John Healey: Perhaps I did not make myself clear. The point I was making was that those manufacturers that already have a memorandum of understanding in place with us in a sense have a head start, because they have in place the information provisions and the relationship with HMRC on which the provisions and requirements of clause 2 will be based. The point about clause 2 is that the obligations that it will contain and the sanctions that may potentially apply will apply to all manufacturers that may be supplying the UK market, not just those that have memorandums of understanding already in place. I hope that that helps the hon. Gentleman.

Paul Goodman: I was coming to that point, but if I am correct I think the record will reflect the fact that the Financial Secretary did say that he did not want written into the Bill any special treatment for those manufacturers who had signed memorandums of understanding, which would mean that they would not have to go through exactly the same procedures as other manufacturers who had not signed. He did of course say that those who had signed these memorandums of understanding would be in a better position; that is true.
However, my concern is about what the Financial Secretary said about writing into the Bill a provision that if a manufacturer had previously agreed a memorandum of understanding, that manufacturer would be exempt from some of the procedures in relation to, for example, notices being provided in writing. He said that that would send the wrong signal. I am not quite so sure about that; I think it might actually send the right signal were a manufacturer, or manufacturers, able to enter into memorandums of understanding that would make it clear to the authorities what they were prepared to do to counter fraud, and if they did so it might actually be helpful to them to be able to come to that kind of arrangementto be able to circumvent some of the procedures in clause 2.
I am not going to press the amendment to a Division at this stage, but we might return to this matter in due course.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.

Clause 3

Rate of duty on beer

Question proposed, That the clause stand part ofthe Bill.

John Healey: We now quit cigarettes and move on to beer.
Clause 3 increases, in line with general inflation, the excise duty charged on beer. That is part of a broader package of decisions on alcohol duty that continue progress towards the Government’s long-term aim of achieving a fairer balance of taxation across all alcohol products without imposing real-terms increases on those, such as beer, that currently are more lightly taxed.
Excise duties on alcohol provide a crucial£7.9 billion a year to invest in tackling crime and essential public services, such as schools, hospitals and transport. Beer accounts for more than 40 per cent. of alcohol duty receipts. The inflation-only duty increase, which, together with VAT, is equivalent to about a penny a pint, is necessary to maintain that important source of revenue. By way of background, I remind the Committee that that modest increase, a freeze inreal terms, follows freezes—actual, not real-terms freezes—in beer duty in three of the past eight Budgets.
However, I am aware also of the pressures on brewers and the pub industry, which play an important part in our economy, our heritage and, for those of us who like a beer, our leisure. This modest, inflation-only increase in beer duty recognises their concerns but maintains an important stream of revenue necessary to support our long-term commitment to continue to increase investment in some of our vital public services. I commend the clause to the Committee.

Paul Goodman: I shall be as brief on this clause as I was lengthy on clauses 1 and 2. We have no quarrel with the inflation-only increase in the price of beer, and do not oppose the clause.

Julia Goldsworthy: I should like to thank the hon. Member for Wycombe (Mr. Goodman) for his generous welcome.This morning I was at a PricewaterhouseCoopers conference on public services reform that had been arranged prior even to my joining the Liberal Democrat Treasury team. Unfortunately, the conference was unavoidable and I could not be here this morning.
We have no quarrel with the increases in excise duty on beer in clause 3. Including VAT, it represents a penny a pint and it is sensible to maintain revenues. I should like to raise only one point. Why did the Chancellor of the Exchequer feel it appropriate to freeze duties on sparkling wines, in anticipation of success at the World cup, when the majority of supporters will be drinking beer, not champagne?

Philip Dunne: I should like to raise a brief point, to which I hope the Financial Secretary will respond; it is the obverse of the point that I raised about tobacco duty. There has been an inflation-only increase on duty on beer, but there has been a freeze on spirits for, I think, the eighth Budget in succession; I may have got that wrong. In real terms, the duty on spirits has declined by 18.4 per cent. since 1997.
Put that in the context of the public health aspects of excise duty, which were part of the justification for the increase in tobacco duty. Today we have learned that the primary justification for the increases in excise duty on alcohol is to do with revenue, yet the incidence of alcohol as a cause of admission to hospitals is increasing steadily.
According to my calculations, there was a rise of4.6 per cent. between 1997 and March 2003, the last period for which statistics are available in the 2004 statistical bulletin. That is an increase of 8,000 to 176,100 admissions in which alcohol is cited as the primary reason, or is referred to, in the relevant note. There is at least a case—I should be interested to hear whether the Financial Secretary considered it during his preparation for the Budget—for using excise duties as a means of improving public health in relation to alcohol-induced illness.

Colin Breed: In a similar vein, the explanatory notes say that since 1997 the duty on beer has fallen by 6 per cent. in real terms. That is not a huge amount, but it is a fall in real terms. Yet during that period we have seen clear evidence that alcohol, particularly beer, plays a large part in some of the antisocial behaviour, not least binge drinking, that we experience from time to time.
We have recently seen a relaxation of the licensing laws and availability in terms of cost and access has increased. It would not be surprising if we saw more antisocial behaviour, let alone the health problems that the hon. Member for Ludlow described.
We have spent a lot of time discussing the smuggling of tobacco but have not mentioned the considerable amount of beer that is imported during trips to hypermarkets on the continent. The brewery industry is probably right to be concerned about the amount of beer that is being imported in that way.
Overall, there is a case for not objecting because I think the increase is correct, but we should recognise some of the dangers of alcohol, particularly among young people, and recognise that price is a driver, as it is in other areas. The Government should at least look at the overall duty on beer not just as a revenue-raising exercise but as a contribution to health and reducing some of the antisocial behaviour that emanates from the consumption of large quantities of alcohol.

John Healey: The reason for the decision on beer duty compared with that on spirits is that spirits are significantly more heavily taxed than beer and we have in place a long-term policy goal of a fairer balance of taxation across all alcohol products. That is the reason for the differential treatment in this year’s Budget.
In reply to the hon. Member for Falmouth and Camborne, spirits are heavily taxed and sparkling wine is the most heavily taxed of all alcoholic drinks. That is part of the reason why the decision that we took in previous years to freeze the duty on sparkling wines was taken again this year. There may be some champagne drinkers among the officials who support me on the Bill because I have a note that says that the freeze on the duty on sparkling wine will affect not only the traditional champagne products to which the hon. Lady referred, but the excellent sparkling wines from Britain, including the 2002 Merret Bloomsbury from the RidgeView estate in East Sussex which was recently crowned the best sparkling wine in the world at the international wine and spirit competition.

Question put and agreed to.

Clause 3 ordered to stand part of the Bill.

Clause 4

Rates of duty on wine and made-wine

Question proposed, That the clause stand part ofthe Bill.

John Healey: The clause increases the rate of excise duty charged on still wine in line with general inflation. The duty on sparkling wine is unchanged. Wine accounts for about 28 per cent. of total alcohol duty receipts. The increase, with the VAT, is equivalent to1p on a glass of wine and 4p on a bottle of wine. It is necessary, as is the measure on beer, to maintain this important source of revenue to support our investment in public services.
I am also aware that there are concerns in the wine trade, which argues that the demand for wine is beginning to weaken. We recognise that and that the wine trade plays an important part in our economy. However, we need to maintain our revenue and support for public services. The increase is modest and is in line with inflation only. It does no more than maintain the real value of the revenue from that part of the alcohol duty regime, so I commend the clause to the Committee.

Paul Goodman: Again, we have no quarrel about what is proposed in this clause, although we note the wine trade’s concerns, to which the Financial Secretary referred.
I have a question that arises from the point made by the hon. Member for Falmouth and Camborne about beer, champagne and the World cup. I am sure that the Financial Secretary will be able to give us a better insight into the Chancellor’s thinking than I can; if he cannot, perhaps the Economic Secretary could. I assumed that the Chancellor’s thinking was that there would be good reason for people to drink more champagne than beer because of what would happen in the World cup. That drew my attention to a curious point that arises because the Chancellor said,
“in anticipation of World cup success this summer, I am freezing duty on champagne, and on British sparkling wine.”—[Official Report, 22 March 2006; Vol. 444, c. 297.]
He did mean World cup success for the England team, did he not?

Julia Goldsworthy: Again, I have no real issue with the clause, but I recognise the points that have been raised by various hon. Members about the differential impacts that different types of alcohol can have on antisocial behaviour and the negative impacts that they can have on health. Does the Treasury have any plans to work with the Department of Health to examine the differential impacts of different forms of alcohol? Will differential pricing be considered as a way of affecting behaviour?

John Thurso: In case the Minister might wish to make reference again to International Wine and Spirit Competition Ltd, may I declare an interest? I am the chairman of the company.

John Healey: I did not want to prolong this debate. I thought that I had responded to the points, but more emerged. I congratulate the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso) if that is indeed a company that he chairs. I am glad to have been able to pay tribute to it. I assume that he would have done so anyway, but I am glad that I did just in case.
May I say to the hon. Member for Falmouth and Camborne that we work closely with the Department of Health on some of the concerns that exist for all of us about the impact of excessive drinking and the antisocial behaviour, aggression, violence and damage that often flow from it? Tax is often a blunt instrument. We have not been convinced that using alcohol duties would be an effective way of trying to reduce the harms caused by excessive alcohol consumption. That is not a feature of Government policy and in my judgment the case for it to be has not been made.
I say to the hon. Member for Wycombe that the Chancellor is extremely well informed about football. The fact that Scotland has not qualified for the World cup finals means that his loyalties can be completely and undividedly behind England in this World cup. I believe that he made that clear in an interview that he gave this morning on GMTV.

Question put and agreed to.

Clause 4 ordered to stand part of the Bill.

Clause 5

Repeal of provisions of ALDA 1979 of no practical utility etc

Question proposed, That the clause stand part ofthe Bill.

John Healey: This clause is of a rather different nature, although it falls within the broad chapter of excise regimes. I am pleased that we are able to introduce it. It reflects the Government’s commitment to simplifying and updating tax administration thatis outdated, outmoded and causing unnecessary complications for taxpayers. Those complications can also add to businesses’ compliance costs, and sometimes act as a barrier to entry to market. The clause allows us to remove from the statute book a number of provisions that fall into that category.
The clause amends the Alcoholic Liquor Duties Act 1979 by removing a number of provisions that are either obsolete or no longer serve any practical purpose. Some of them restrict businesses’ legitimate commercial freedom while frankly no longer serving any useful purpose in terms of revenue protection. The clause is part of our wider package of changes to the alcohol duties regime, under which we will repeal or simplify over 40 provisions in alcohol legislation. It has been welcomed by the drinks industry. We are discussing in detail with them whether there are areas where we could go further. I commend the clause to the Committee.

Paul Goodman: We have received no representations suggesting that any inappropriate changes are being made under the clause, or that any changes are being made in error, so we will assume that the clause is in order and shall not oppose it.

Julia Goldsworthy: We have no issue with the clause, and welcome the fact that it simplifies and updates tax administration that causes unnecessary complications. It is just a shame that the same cannot be said of many other clauses in the Bill.

Philip Dunne: I rise to ask the Financial Secretary for clarification on subsection 1(o), which removes section 82—which is on the power to make regulations with respect to stills—from the 1979 Act. I ask him to clarify precisely what powers are being removed, and shall explain why I have an interest in the subject. Naturally, I welcome deregulatory moves of any kind, and particularly those that scrap unnecessary regulations. I would particularly welcome the measure if it encouraged further agricultural diversification, which is how I read it.
I represent a rural constituency where agriculture remains an important economic driver. Many farmers are looking to establish local products with higher value added, through which they can diversify, and many smaller farmers in my constituency still have orchards—they have not been grubbed up, as in many other parts of the country—supplying apples, pears, damsons and even cherries and soft fruits to local processors of cider, fruit wines and spirits. The largest cider processor in the country is located in neighbouring Herefordshire, and a lot of my farmers provide it with fruit.
I hope that the Financial Secretary can confirm my reading of the clause, which is that in future it will be possible for such growers to establish their own mini-stills and to distil their product into spirits, which they can sell through local markets or whatever outlets they can find. That would be a welcome development. It might also help to ensure that any such activity that is going on at the moment in an unregulated and illegal fashion is brought into the realm of the above board, which would be welcome. I have some limited experience of that practice in other counties, because my father-in-law—he is no longer with us, unfortunately—lived in Somerset, which is another area of substantial apple production. He took me to a number of his neighbouring farms where some activity of that kind had been under way for decades. I am sure that that is not widespread, but there are pockets in the country where some distillation is taking place behind barn doors.

John Healey: In response to the hon. Member for Ludlow, in many ways section 82 of the 1979 Act is a throwback to a regime that was largely dispensed with in the 1980s. It required, in former days, people other than distillers, rectifiers or vinegar makers who kept stills to take out an excise licence and this regulatory power is no longer required. Anyone who uses a still to distil spirits—this is the point the hon. Gentleman made—must nevertheless have a distiller’s licence and they are committing an offence if no licence is held.
There are other provisions in the clause dealing with the simplification relating to stills and distillers, and to give the Committee an example of the degree of obsolescence in some of the provisions we are proposing to repeal, we shall repeal section 15(4), which requires distillers to provide accommodation for HMRC officials in the distillery. That is clearly no longer required because the pattern of monitoring and assuring the operation of distillers has changed these days. That is an exemplar of what we want to achieve through the clause and I hope that the Committee will support it.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.

Clause 6

Rates until 1st September 2006

Question proposed, That the clause stand part ofthe Bill.

John Healey: The clause amends the duty rates as set out in primary legislation so that they will be the same as the amounts a person is currently liable to pay. It also provides that certain statutory instruments introduced to adjust the liability to duty on hydrocarbon oils and other fuels will cease to have effect. The clause will bring about a technical change. It simplifies the legislation so that the actual rates of duty for road fuels and oils can be easily established by reference to one piece of legislation, rather than sources of primary and secondary legislation, as at present.

Paul Goodman: As the Financial Secretary said, the clause deals with technical changes relating to hydrocarbon oil duties. I would like to make some general remarks about further changes proposed,but they would be more appropriately made under clause 7. We have no objections to the clause.

Julia Goldsworthy: We have no issue with this clause. It looks back more than it looks forward and, as the Minister said, it will put on the statute book changes that took place under statutory instruments. We will talk about future changes, but it is more appropriate to deal with those under future clauses.

Rob Marris: Can the Financial Secretary tell me why the rate of duty on aviation gasoline—avgas—is charged at one half the rate specified for light oil, particularly in light of the environmental concerns that many of us have?

John Healey: As my hon. Friend knows, the freedom of any Government to charge tax on aviation fuel is heavily hedged in by a network of international agreements and conventions, which constrain the policy choices any Government can make in this area.

Helen Goodman: In the light of what the Financial Secretary just said, are the Government taking any steps to re-open or reconsider those international treaties, or to initiate any international negotiations on the matter?

John Healey: We have indeed taken such steps. We have publicly and strongly argued the case that the special protections the aviation industry has in relation to taxation are not warranted. Given the rising concern about climate change and the evidence about the impact that aviation has on producing gases and emissions that contribute to climate change, that is becoming a more pressing challenge. It is one that we must confront internationally, not just because climate change is a global problem, but because any serious solution to the legal constraints that exist in many areas will be found internationally rather than domestically. Owing to difficulty with progress on the tax front, it is also the reason why we have put such a strong emphasis on other measures leading to effective international action that contributes to the climate change challenge. This Government were one of the strongest supporters of establishing and operating the European Union emissions trading scheme, and we remain so. Without wishing to test the limits of what is in order, Mr. O’Hara, we were the first country to set up an economy-wide emissions trading scheme—the forerunner of the EU emissions trading scheme that is widely regarded as an important and effective instrument.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Clause 7

Rates from 1st september 2006

Question proposed, That the clause stand part ofthe Bill.

John Healey: This is a substantial clause, covering a number of areas of excise duty for hydrocarbon oils and biodiesel. The hon. Member for Ludlow will have a particular interest in some aspects of it, because it offers opportunities for constituents such as his in rural areas to diversify their production.
The clause changes the rate of excise duty for hydrocarbon oils and biodiesel from 1 September. Our established policy is that as the UK seeks to meet its targets of reducing pollutant emissions and raising revenue to fund essential public services, fuel duty rates rise each year at least in line with inflation. Budget 2006, however, announced that because of continuing oil market volatility, the inflation-based increase would be deferred until 1 September. Not implementing the change on Budget day, but delaying it to 1 September will cost the public purse £275 million in forgone revenue this year—a considerable saving to the motorist in anybody’s terms.
Fuel duty rates were last increased in October 2003, and since there were cuts in rates in 2000-01 to incentivise the delivery of less pollutant fuels, the main duty rates for road fuels are lower in cash terms than they were in March 1999, and 14 per cent. lower in real terms than they were in 2000. That is an equivalent saving of 8p per litre on road fuel for motorists. Even after the September increase proposed in this legislation, duty rates will still be lower in cash terms than they were in March 2000.
Our policy on fuel duty has been to balance a number of competing and complex issues: for example, our environmental improvement objectives and our concern to raise sufficient funding for public services, with the impact on families and businesses when fuel costs may be higher than they need to be. We have weighed the social, environmental and economic imperatives in the duty decisions in the clause. We have been ready to freeze duty when appropriate and to increase it when circumstances dictated. Through that approach, we have been able to ensure that fuel duty policy supports environmental goals while retaining flexibility at times of high oil market volatility.
Questions have been raised about why we increased duty rates for rebated oils from 1 September in the Budget, after we increased them in the pre-Budget report last year. It is important to stress that the increase merely ensures that the existing differential between rebated oils and main road fuels is maintained and remains unchanged. Our HMRC analysis suggests that even a small increase in the differential offers serious fraudsters appreciable extra profits. Freezing rebated fuel duty while increasing the main fuel duty rates would have widened the differential by 1.25p per litre, significantly increasing the incentive for fraudulent misuse of rebated fuels as road fuel. That could have undermined some of the efforts and pressure that we are exerting on oils fraud through the oil strategy.
However, I am also aware that some industries are heavy users of rebated fuels and that they form a significant proportion of their operating costs. We announced in the Budget that the Government would work with sectors that make heavy use of rebated fuels to examine the wider impacts of the oil strategy, and those discussions have already begun.
We must continue to recognise that transport is the second largest source of carbon dioxide emissions in the UK, and that emissions are likely to continue growing until the end of the decade as the UK economy remains strong. Duty differentials help to encourage the use of more environmentally friendly fuels and to stimulate the development of new technology that can help to reduce greenhouse gases. They can therefore help to reduce the impact that motoring may have on local air quality as well as on climate change.
Therefore, the clause covers the duty rate for biodiesel. It is worth reminding ourselves of the impact of the differentials that we introduced for biodiesel in July 2002 and for bioethanol in January 2005. Several years ago, there was virtually no market for biofuels in the UK. It has grown to 118 million litres, or 0.25 per cent. of the total road fuels market. That is still a low base and there is still a long way to go, but the measures that we are taking will increase usage to 5 per cent. by 2010-11. The 2006 Budget proposes to encourage the wider take-up of biofuels by announcing the extension of the 20p per litre duty incentive for biodiesel and bioethanol until 2008-09, which will add a degree of certainty for those who are planning to invest in and develop the industry.
We also set out in the Budget further details on how we will introduce a renewable transport fuel obligation, which will require transport fuel suppliers to ensure that a percentage of their sales are from a renewable source. It will be introduced in 2008-09 with the obligation level set in the first year at 2.5 per cent. and in the following year, 2009-10, at 3.75 per cent., reaching the target of 5 per cent. in 2010-11.
The renewable transport fuel obligation is a significant new measure that will give long-term certainty to the development of the industry. Hon. Members may be interested to know that it will also deliver savings of some 1 million tonnes of carbon a year by 2010, which we estimate is the equivalent of taking 1.4 million cars off the roads in Britain. I commend the clause to the Committee.

Helen Goodman: We acknowledge that the Financial Secretary and the Treasury have to balance several competing demands in this clause. One is in respect of the impact on the environment. If there were no increases in duties, the Treasury would be subject to criticism on that score. Another demand is in respect of the impact on agriculture, about which my hon. Friend the Member for Ludlow is extremely concerned. If there were increases in duty, the Government would be criticised on that score, so it is difficult for them to strike a balance.
Then there is the question of fraud. The Financial Secretary and I considered the matter previously, during a debate in January on a statutory instrument. I asked him what the impact on fraud had been of reducing the differential between main road fuels and rebated fuels. I wanted to know to what degree any reduction in fraud had been the result of beefing up fraud detection by the recruitment of more inspectors, rather than narrowing the differential. I want to give credit to the Financial Secretary, who said with commendable honesty that he could not answer the question. He went on to say that
“analysing and estimating the scale of fraud generally is a relatively inexact science. Very often, it is not really possible to isolate the impact of individual measures.”—[Official Report, Third Standing Committee on Delegated Legislation, 9 January 2006; c. 10.]
That raises the question of how effective the anti-fraud element of the measures will be.
As the increases will not be implemented before September and will generally be in line with inflation, we shall not oppose them. I return, however, to the question of balance. We are concerned, as is the National Farmers Union, about the effects of rises on agriculture. The Financial Secretary and I know that the NFU announced in the wake of the Budget that it intended to write to the Chancellor seeking an exemption from the increase in the cost of red diesel. I do not think that the Financial Secretary confirmed that he received such a letter, but I should like to know whether he did and, if so, what is the Government’s response?
We shall not oppose the clause. We have serious concerns about the effects of the rises on agriculture, and we will be watching closely what happens in the run-up to next year’s Budget.

Julia Goldsworthy: I begin by commending the Financial Secretary for the clause’s welcome measures to encourage more environmentally friendly vehicle use. I hope that the introduction of greater certainty to the duty differentials on biofuels will make a difference and will encourage more people to make the necessary conversions.
However, I would appreciate it if the Financial Secretary provided clarification on the definition of biodiesel. Any confusion about the definition could hinder the development of the market. I understand that biodiesel must be “of diesel quality,” which means:
“It must be a liquid—not gaseous at a temperature of 15° C and under a pressure of 1013.25 millibars; and
It must be made from biomass or waste cooking oil;
The total ester content must not be less than 96.5 per cent. by weight; and
The sulphur content must not exceed 0.005 per cent. by weight or be nil.”
According to the Hydrocarbon Oil Duties Act 1979, “diesel quality” means that when blended with ordinary diesel, biodiesel will run an engine that would normally run on diesel. Biodiesel does not have to be used exclusively in the fuel tank, although that is possible.
I understand that vegetable oil is not perfect for cars. In order to make it suitable for car use, the oil must be modified in some ways. One way to do so is through transesterification, which involves cleaning the vegetable oil so that it can be used in a diesel engine. That uses a great deal of energy and some methanol, and leaves glycerine as a by-product that must be disposed of. It is also possible to add certain things to vegetable oil to make it usable. On the other hand, it is possible to make changes to the car so that it can accept vegetable oil as it is.
Does adding chemicals make vegetable oil of diesel quality? If the car is modified, does that make unmodified vegetable oil of diesel quality? There is clearly an element of confusion that could lead to perverse tax incentives for people to use changed vegetable oil, which has to go through a damaging process that could harm the environment, while those who go to the expense of modifying their engines or using additives might have no similar incentives. If such incentives exist, does the Treasury intend to make them clear?
I turn to the deferred increase in hydrocarbon fuel duty rates. I understand that the increase will not take place until 1 September 2006. When the re-valorisation kicks in, it will represent an increase in line with inflation. It will not be a real rise but will prevent a real-terms fall. That is welcome; since 2000, when fuel duty began to decline in real terms, the rate of increase in greenhouse gases has doubled. The take of green taxation as a percentage of national income has also fallen during that time. In 1999, green taxes represented 3.6 per cent. of national income; that has now fallen to 3 per cent. Fuel duty accounts for two thirds of the total take of green taxation, so the rise will help to counter the decline.
However, a question similar to those raised during our discussions of other measures on vehicles arises: what changes will the clause make to behaviour? What other measures is the Department considering to fulfil its environmental obligations? The proposals are okay as far as they go, but is the Treasury considering longer-term ways of producing changes that will impact on behaviour, pollution and the environment?
The changes in the clause will not achieve that; neither will the changes proposed for vehicle excise duty. What meetings has the Treasury had with the Department for Transport, which is considering proposals for road-user charging—a real way of making the polluter pay and relating vehicle use and the impact that it has on behaviour?

John Thurso: My hon. Friend is absolutely right to say that road-user charging is the most effective way to tax road use; it impacts on those who create the most environmental problems—in other words, cause congestion. It has the added benefit of reversing the current problem: people who live in far-distant places such as the north of Scotland pay 12p more for their fuel than those in metropolitan centres. Road-user charging puts more tax on people in areas with congestion and therefore with alternatives.
Implementing that will take five or six years at the very least. In the interim, what could my hon. Friend offer my constituents? Would she favour using the EU derogation, which would permit such remote areas to have a lower fuel duty?

Julia Goldsworthy: I can put my hon. Friend’s constituents’ minds at ease; I shall support the use of the EU derogation on that issue. Amendments were tabled in respect of other measures that would ease the burden of those in rural areas who have no alternative but to use a car. Unfortunately, they were voted down.

Rob Marris: The hon. Lady seems to be contradicting herself, as she did during Committee stage in the House. She criticised the Government for the fact that the proportion of green taxes has fallen, but now agrees with the hon. Member for Caithness, Sutherland and Easter Ross that they should fall further through an EU derogation on fuel duty. Her position seems entirely contradictory, although that is not surprising in a Liberal Democrat.

Julia Goldsworthy: I am afraid that the hon. Gentleman may have missed the point. The derogation refers only to a tiny, very isolated, minority of areas. If alternatives such as improved public transport were provided in such areas, they would probably end up being less environmentally friendly than allowing the people there, who have no other option, to continue to use their cars.
If we are to impact on behaviour, we have to change the behaviour of those who have other options. As has been mentioned, any changes would have a massive impact on the pockets of those living in rural areas, but would not influence their behaviour. The only reason for using pricing mechanisms to change behaviour is to make people use an alternative; if they do not have one, they will have to continue to pay and the objective will not be achieved.

John Thurso: I am grateful to my hon. Friend and shall not intervene on her again. The question to ask the Government is as follows: why should increases in fuel duty be capped when they reach a certain point so that people are not adversely affected, when it is all right for the prices people pay in remote areas—they pay 5 per cent. more—not to be capped?

Julia Goldsworthy: My hon. Friend makes a good point. I shall close my remarks by expressing my hope that the Minister will provide clarity on the time scale to which he will work with the Department for Transport on introducing road-user charging, so that the changes in the clause represent only a holding measure rather than a long-term strategy.

Helen Goodman: I welcome subsections (3) and(4), which maintain the differential that the environmentally friendly biodiesel and bioethanol have in the whole regime. Together with the renewable transport fuels obligation, the provision is providing a significant incentive for both the domestic and European production of these fuels.
In last year’s Standing Committee on the Finance Bill, I referred to the excellent farmers’ co-operative, Farmway, which is on the border of my constituency and that of the Prime Minister. These measures are of environmental benefit. They are of benefit to the farming community because they are providing an alternative outlet for it. They also have significant employment benefits. In fact, as a result of the additional incentives, there is a chain of petrol stations called “One green route” throughout the constituency where people can specifically buy biodiesel and bioethanol.
I have some questions on the capital allowance treatment of biodiesel and bioethanol on which I hope we can have a move to more generous treatment. As for subsection (2)(c) and the ultra-low sulphur petrol rate, I understand from the explanatory notes that it affects the rate of duty on aviation gas as well, which is charged at one half of the rate set aside for light oil.
Earlier, the Financial Secretary explained reasonably that we are constrained in what we can do on aviation fuel due to a network of international treaties. I am sure that he is aware that the fastest growth in aviation fuel is on domestic flights. Therefore, does the hon. Gentleman know whether international treaties apply to fuel bought for domestic as well as international flights?

George Young: I want to follow the hon. Lady by focusing on subsections (3) and (4), which maintain the differential rates. The Financial Secretary approached the matter from a number of angles. He mentioned the agricultural angle. Like my hon. Friend the Member for Ludlow, I have a rural constituency where there is enormous interest in diversification—an appetite. They have got to have either a new crop of houses or a new crop of biofuels. Within an appropriate balance, I would prefer to have the biofuels rather than an excess crop of houses in some of the scenery. Two points arise from that.
First, the Minister mentioned enhanced capital allowances. What progress have the Government made in the application for state aids clearance? Is the Minister still confident that he will get the necessary clearance and that the scheme will be up and running by 2007? Because without that, the infrastructure to support the diversification may not be available.
I want to raise a second, broader issue. The Minister is maintaining a 20p differential, but what is the logic behind 20p? Why has that figure been chosen? Is there any flexibility or are we stuck with 20p for ever and a day because that figure was put in initially? Some targets in the Red Book seem to be rather modest against a background of 0.25 per cent. of road fuels being accounted for by biofuels. That does not seem a high base, but the targets are to hit 5 per cent. by using the RTFO by 2011.
The Minister said that the RTFO was a new invention. In a sense it is, but it is a close relative of the non-fossil fuel obligation, which was introduced by the previous Administration and applied to the supply of electricity and fuel. I welcomed that. However, if the Government are serious about reducing carbon dioxide emissions, will a target of 5 per cent. deliver? The higher target of 5 per cent. after 2010 and 2011 is heavily qualified. Page 766 of the Red Book says:
“The Government intends that the target should rise beyond 5 per cent. after 2010-11, so long as infrastructural requirements and fuel and vehicle technical standards allow, and subject to the costs being acceptable to the consumer.”
That is important small print. Should not one approach the matter from the other direction? Given that there is a strong commitment to reduce carbon dioxide emissions and that transport costs account for such a high percentage, should we not find out the percentage reduction that has to be achieved through the RTFO and work backwards through that and, perhaps, end up with a different differential from the one that we have at the moment? Perhaps we should do that, rather than starting from where we are and arriving at a solution that may not enable the Government to hit their carbon dioxide emission target.
I should like to know whether there would be any flexibility in the Government’s approach, if it turned out that their targets were not ambitious enough to deliver the Kyoto targets to which I believe they remain committed.

Stewart Hosie: Some hon. Members may recall that, in last week’s Committee of the whole House debate concerning vehicle excise duty in sparsely populated rural areas, the point was made that the major financial pain felt by people in such areas was from the price of fuel, not the one-off cost of vehicle excise duty. Indeed, with petrol and diesel in the Western Isles today sitting at around £1.06 a litre, the time has come for some form of change to the duty system.
The Financial Secretary said earlier that he had had numerous discussions and consultations and published a large amount of information. I want to question him on how he got to the duty rates that will be implemented from September 2006. I welcome the comments that he made earlier about discussions with those who use rebated fuels. In his discussions on setting this year’s rates, did he consult the haulage industry, particularly, which is continuing to find trading difficult, in no small measure due to the high cost of fuel and not least because, as Committee members know, the largest element of the cost of a litre of fuel—slightly under 50 per cent.—is duty, with the remainder, up to around 65 per cent. of that cost, being VAT?
In the Financial Secretary’s consultations, did he speak to organisations other than the obvious ones concerned with the production, refining and distribution of fuel and the large motoring organisations? Did he speak to some of the smaller, sectoral and geographic interests, where the high price of fuel is particularly punitive, being based on a high duty regime? Did his review and his consultations and discussions not only lead him to set this year’s duty rates, but will those in any way inform debate in future—perhaps on the need for a more sensitive fuel duty regulation regime? Will he consider in future, notwithstanding the rates set for this year, the EU derogation option, which has been raised on a number of occasions by the Liberal Democrats? I am straying ever so slightly, but do the Financial Secretary’s discussions lead him, perhaps, to changes in subsequent years’ excepted vehicles amendment to schedule 1 to the Hydrocarbon Oil Duties Act 1979 statutory instrument? Those are important questions.
I hope that in the Financial Secretary’s discussions he considered the effectiveness of the fuel duty regime in relation to business competitiveness, not least because a litre of unleaded petrol, at 94.6p, is cheaper in every other European country, with the exception of Denmark, Finland, the Netherlands and Norway, and because a litre of diesel, at 97.8p, is cheaper in every other country reported by the European Road Information Centre, based in Geneva.
I should like briefly to give a few examples: the Automobile Association’s figures from April show that the 97.8p average price in the UK is opposed to 73.2p in Austria, 78.91p in Belgium, 77.84p in France, 69.27p in Spain, and so on. Is the Financial Secretary confident that those increases, delayed as they are until September, remain the only way to proceed, or does he keep an open mind about whether a more sensitive regulatory regime may be appropriate and whether future derogations may be appropriate? Will he consider options to help sectoral and remote geographical interests?

Brooks Newmark: I shall take a slightly different focus. I notice from the explanatory notes that the decision to defer the increase until 1 September was expected to cost £275 million to the Exchequer in revenue forgone in 2006 and 2007. Part of the rationale for the delay, as I understand it from the Government’s announcement regarding the 2005 Budget, was that the increases would not go ahead because in the short term uncertainty and the risk of price volatility remained high, with oil trading at the end of the week preceding 6 June at above $59 per barrel. That was a year ago. The price of crude has gone up, and I believe that it is more than £70 now.

Stewart Hosie: Dollars.

Brooks Newmark: I am sorry. The price is fairly close to $70, so it has gone up and volatility has gone up. I read from the explanatory notes:
“Changes in oils duty rates would normally take place on Budget day, but, owing to continued volatility in the oil market, the Government has decided to defer increases in fuel duty rates until 1 September 2006.”
Volatility has increased since the production of that document and since the report last year, and prices are even higher than they were in 2005. So, I am curious about why 1 September 2006 is still the magic date for increasing duty, when the situation has not only remained the same, but gotten worse. I look forward to the Minister’s response.

Rob Marris: It was an interesting exchange with the hon. Member for Falmouth and Camborne, because principles are all right for the Liberal Democrats until they are inconvenient. We heard the principle that the proportion of taxes from green tax should rise until it is a bit inconvenient to her hon. Friend from the north of Scotland, the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso), when the proportion would drop—but we heard that that is all right, because it is only a tiny drop. There go the principles. I understand: it is pragmatism.

Julia Goldsworthy: It is an issue of reconciling principle with fairness. If we are going to take difficult decisions with a view to having an impact on consumer behaviour, we must consider the areas in which the burden will fall heaviest. It will fall heaviest on those who are least able to afford it and have no alternative. I see no contradiction in pursuing fairness and greater environmental measures.

Rob Marris: I agree with the hon. Lady’s general proposition that there is no contradiction. Unfortunately, in the proposition that she set out earlier, there was just that contradiction, which is what I highlight to the Committee.
Secondly, the biodiesel and biofuel chemistry lesson was helpful—esterification and all that stuff. It would be interesting if the hon. Lady explained her party’s view on the E85 fuel, which is being pioneered in her region. I am happy to take an intervention.

Julia Goldsworthy: I thank the hon. Gentleman for his invitation to intervene. Of course we fully welcome the fuel. I was asking for clarification, because there is confusion among consumers about what rebates they may be entitled to and what support may be available to them to make a more environmentally friendly conversion to their vehicle.

Rob Marris: No details on E85 then either.
I have a question for the Financial Secretary. In terms of the renewable transport fuel obligation target of 5 per cent. by 2010-11, to which he and other hon. Members referred, what proportion of arable land in the United Kingdom would be required to provide the bio part of the biofuels? It is all very well talking about such targets, which is very laudable in terms of cutting emissions, but if it means that we will have crops for fuel at the expense of crops to eat, there may be a limit to how far we as a relatively small country can go because of the amount of arable land that we have. Was that availability of land, or lack thereof, taken into account in setting the 5 per cent. target?

Philip Dunne: I will be brief as many of the points that I wanted to raise have been covered by other Members. 
On the level of oil prices and the relationship between duty, VAT and price, which the hon. Member for Dundee, East (Stewart Hosie) went into in some detail, when these measures come into force at the beginning of September we are likely to face a point of extreme political sensitivity. When I filled up my car with petrol over the weekend, I paid 98.9p per litre. Once this duty comes into force the price, assuming everything else stays the same, will tip over the symbolically highly significant £1 a litre point. A couple of years ago, the Chancellor responded to pressures—in particular from the haulage industry, as was referred to earlier—by deferring an increase in duty. However, as my hon. Friend the Member for Braintree said, oil prices have now risen considerably above the point of the 2005 Budget when that deferral was introduced. I confidently predict that we will be living with petrol and diesel prices that will rebound on the Government. That could be good news for those of us who are not members of the Government, but I am more concerned about the consumers who will have to pay these prices to help the Chancellor with his public accounts problems.
I wish to touch briefly on two other points: rebated oils and biofuels. In respect of the rebated oils, I served on the Standing Committee that discussed the last increase in January, when I declared an interest as a farmer and therefore a consumer of red diesel, which I should do again. I expressed the concern that at a time when agricultural incomes are under great pressure we are adding to the difficulties of farming for food in terms of making a profit by raising the Government’s take of that endeavour. Yet again, I plead with the Financial Secretary to consider whether it is really appropriate to maintain a duty differential. I heard his arguments in relation to fraud on rebated oils, but I am unconvinced.
On biofuels, I wish to make a point that followson neatly from something that the hon. Memberfor Wolverhampton, South-West referred to. The renewable transport fuels obligation is welcome. It is starting from a very low base, as my right hon. Friend the Member for North-West Hampshire suggested. However, what is not included in these measures, and in my view should be, is any suggestion that the percentage of renewable fuels that the Government are rightly encouraging should come from a sustainable source. At present, the cheapest biofuels come from parts of the world where palm oil can be produced, and palm trees, out of which palm oil is extracted, are being planted in areas that hitherto were sources of the greatest biodiversity on the planet—parts of the equatorial forests. We should not put in place measures that will encourage the further despoliation of forests in Brazil and elsewhere along the equator. There should be a measure—if not in this Bill, then in the next Finance Bill, which I look forward to discussing with the Financial Secretary—that ensures that we are only supporting the use of sustainable renewable fuels.

Stewart Hosie: In discussions with the National Farmers Union Scotland last year, I was told that many of its members were desperate, willing and able to grow oilseed rape to turn into biodiesel but the processing capacity simply did not exist. Is the hon. Gentleman suggesting that the processing capacity to build up secure supply in this country should be addressed in a future Finance Bill, so that we do not have the despoliation of the third world by the growing of trees for palm oil there to provide cheap supply to the west?

Philip Dunne: I am grateful for that intervention but I suspect that the Financial Secretary will respond by saying that that is precisely why he announced the introduction of capital allowances for biofuels in the Budget, a fact that I welcome. Nevertheless, it is a valid point that by insisting on an arbitrary duty differential of 20p per litre the Budget is not providing the right incentives to encourage domestic biofuel production. No reason has been given that bears scrutiny as to why the duty differential should be maintained at 20p, and if there is a logical analysis supporting that figure I should be interested to hear it.

Helen Goodman: The hon. Gentleman may not believe that there is any logical reason for it, but I can tell him that industry members fully support it and see its benefits for industry financing.

Philip Dunne: I am grateful for that intervention because I think that the hon. Lady misunderstands my point. I am not arguing that the duty differential should be scrapped; I am arguing that it should be maintained not at 20p but at 21.25p. There should not be an increase in duty on the biofuels that are proposed in clauses 3 and 4. The hon. Lady is acknowledging that from a sedentary position.
I shall make the following final remarks because I take a great deal of interest in biofuels for the purposes of agricultural diversification, as the Minister was kind enough to say. In my constituency there is what I believe to be the very first 100 per cent. biodiesel forecourt pump—I was certainly told that when I opened it. It is in the town of Bishop’s Castle, which is a leading innovator in all forms of green effort. The feedstock for that plant comes from waste rapeseed oil from the catering establishments of local authority schools, which I am told is the only source of waste rapeseed oil that is available in this country and which is clearly a very finite supply. To expand domestic production we must undoubtedly put farmers in a position where they can supply on an industrial scale, and my understanding is that that is beginning to happen, although only slowly. There are sugar beet farmers in my area who would welcome the opportunity to turn sugar beet into bioethanol, but at present the only plant under construction is in Norfolk, and it is probably uneconomic to transport material to Norfolk from Shropshire.

Rob Marris: I caution the hon. Gentleman on his enthusiasm for used rapeseed oil or canola oil deriving from schools. As the Ricardo Associates report for the Department for Transport showed, either last year or the year before, if that fuel is put in unmodified engines, the pollution emitted from unmodified vehicles can be significantly worse than if they were running on diesel or petrol.

Philip Dunne: I am most grateful, and I shall not detain the Committee by discussing with the hon. Gentleman the proportions of fuel that should be ordinary diesel and biodiesel. Biodiesel is being gradually introduced alongside regular diesel in Bishop’s Castle—I am reliably assured that once the tank has been topped up on a sufficient number of occasions it can be used at a 100 per cent. level without engine damage. Fuel efficiency is also improved, and by definition that reduces emissions.

John Healey: I shall try to respond to the points that have been made in a wide-ranging and rich debate that has reflected the different provisions in the clause. I welcome the interest that has been shown on both sides of the Committee in developments in supporting biofuels, including from the hon. Member for Ludlow, the right hon. Member for North-West Hampshire and my hon. Friend the Member for Wolverhampton, South-West. The primary policy purpose of the road transport fuels obligation is environmental impact: the contribution it can make to the UK’s effort to deal with emissions and climate change. To deal with those things we want to expand the UK biofuels market, and that is our principal purpose. The principal purpose is not to expand the UK biofuels industry, although we hope that that will be an important consequence of our approach and we are putting some measures in place to support its development. There are signs that it is expanding. A new biodiesel plant is coming into production and some bioethanol plants are starting to be in process.
My hon. Friend the Member for Wolverhampton, South-West asked whether the 5 per cent. RTFO could be met by domestic rapeseed and crop production in the UK. The short answer is that if he examines the studies that the Department for Environment, Food and Rural Affairs has done, he will see that it is confident that 5 per cent. production could be met entirely from feedstock grown in the UK. That could be done without affecting the production of food crops, which he is concerned about—partly, I guess, because we are a net exporter of wheat. We also have a substantial amount of set-aside land available, which could in theory be turned over to such crops.
The principal purpose of the range of support that the Government is putting in place is to achieve environmental gains by expanding the UK biofuels markets. It is not designed to be a new source of subsidy for UK farmers and agricultural production.

Nia Griffith: Does my hon. Friend agree that there is further potential with the reform of the common agricultural policy, particularly in respect of sugar beet? There will be more opportunities for the poorer nations of the world to export sugar cane sugar to the EU. Subsequently, some areas in Britain where sugar beet has been the main source of income will be interested in turning to biofuels in the future.

John Healey: My hon. Friend is right. I do not think that she joined the debate that I was involved in last night in the Commons Chamber about the future financing of the European Union. The imperative to reform the CAP further was a central part of the agreement that was reached under the UK presidency in December. On sugar, she might be aware that under the UK presidency an historic reform of the EU’s sugar regime took place to remove some of the indefensible levels of subsidy and protectionism that were part and parcel of it.
The hon. Member for Ludlow made the important point that in developing the RTFO we must be concerned about the source of the feedstock, to ensure that there are no unintended consequences that are environmentally damaging. He might be interested to know that as part of the preparation for the introduction and development of the obligation we are examining how we can put in place a carbon assurance system that allows, on a life cycle basis—this is precisely the point that he was making—an assessment of the impact and the contribution that the obligation will make.
You might remember, Mr. O’Hara, that the hon. Member for Braintree promised the Committee this morning that he would never take a view that was different from the view of those on his Front Bench. This afternoon, he has been arguing that the inflation duty increase on road fuels should not go ahead in September. He might have missed the hon. Member for Wycombe saying a little earlier that the Conservatives accepted the provisions in the clause.

Brooks Newmark: Ever on the ball myself, I had a feeling that that question would be asked. That is why I began my mini speech with the phrase, “This is merely a probing question”.

John Healey: We are only on our first day in Committee, although it feels a lot longer than that. I look forward to the further probing questions that the hon. Gentleman may ask the Committee that will be directed, I suspect, as much at those on his Front Bench as at those on ours. The serious point is that the Government keep all options under review, but it is our intention to increase rates in line with inflation from 1 September this year. As in the past, we shall take full account of all the economic as well as the social and environmental factors.
If the hon. Member for Dundee, East believes that there is a case for a different fuel duty regulation regime, he may wish—as his colleagues in the Scottish National party did last year—to frame such a proposal as an amendment to the Finance Bill, which we could debate fully in the future. He asked, in particular, whether we consulted beyond what he might regard as the usual and obvious suspects, including those associations that represent some of the essential users of road fuels, including the haulage industry. I have met the Road Haulage Association several times since the pre-Budget report. Immediately before that, in part to examine the findings of the Burns review, officials met the association almost weekly in the run-up to the Budget. That important sector of the industry has had a fair chance to put forward its point of view. It welcomed, as did Roger King the chief executive of the Road Haulage Association, our decision to defer the increase in fuel duty.
My hon. Friend the Member for Bishop Auckland asked me a straight question about whether domestic aviation turbine fuels are taxable. I shall give her a straight answer: the answer is yes, with the qualification that if the United Kingdom took the unilateral decision to raise significant rates of duty on AVTUR on domestic flights, the consequence might be precisely the opposite to which she wants to achieve. She is worried about environmental impact. Were we to take a unilateral decision, there would not only be a risk to the commercial competitiveness of some of our flights, but a serious risk that airline companies would tanker and refuel outside the United Kingdom and therefore fly extra air miles to service domestic routes, but doing so on fuel that was purchased outside the United Kingdom. Such a proposal might defeat her purpose.
I had not mentioned the enhanced capital allowances for biofuel plants, but the right hon. Member for North-West Hampshire asked me about them. We submitted the application for state aids clearance on Budget day. As he would expect from his knowledge of how the Government work, we had discussed it in detail with the European Commission before we put in our formal submission. I therefore remain confident that we shall gain the clearance that we seek for the enhanced capital allowances. I hope that we can start the scheme early in 2007.
The right hon. Gentleman and the hon. Member for Ludlow questioned the 20p per litre duty discount and support for biofuels. We set it at that rate because we believe that it is a sufficient incentive to help support the development of the biofuels market. Furthermore, because it is a significant source of tax forgone to the taxpayer, we do not want the public purse, in a sense, to be paying over the odds for that form of support. If the right hon. Gentleman and the hon. Gentleman consult the Budget document, they will see that, alongside the duty discount support for the development of biofuels, we have announced that, with the obligation, there will also be a buy-out mechanism. That combination of duty incentive on the one hand, and penalty or discipline through our buy-out level on the other, will give the obligation the kick-start that it requires. It will also give the industry and prospective investors the certainty for the long term that they require from Government policy.
In response to the hon. Member for Falmouth and Camborne, I point out that biodiesel is eligible for duty discount if it meets the specifications set out in the Hydrocarbon Oil Duties Act 1979. That is it. However, we announced in the Budget that the HMRC would review the definition of biodiesel and how it operates. I aim to report back from that review by the time of the pre-Budget report this year, so if there are specific points that she wishes the review to take into account, I suggest that she lets me have them and I will ensure that they are properly considered.
On the hon. Lady’s broader argument, we know that she wants to whack up environmental taxes and price people out of their cars, but the hon. Member for Wycombe reiterated my point that, when making decisions about duty, there is inevitably a balanced judgment to make and a balance of factors that have to be taken into account. Although the hon. Lady is concerned for duty to be used as a way of raising prices so as to discourage people from driving, I point out that when we made our decision on the 2005 Budget, the pump price that motorists were paying for petrol was 82p per litre. We proposed a duty increase of just over 1p per litre, being conscious that that might contribute to achieving our environmental ends, but also balance the other factors. By the time of the pre-Budget report, we decided that we would not go ahead with a duty increase, because the pump price was 6p per litre higher. In those circumstances, because of demand, the market had the environmental impact that the she advocates that we should seek through duty. In the circumstances, we were right not to go ahead with the duty increase and not to load those extra costs on to motorists and hauliers; and for those concerned about the environmental impact, the market and the price mechanism were doing far more of the heavy lifting than the Government could or should do through duty increases.

Julia Goldsworthy: The point that I was making was that we are talking about a very blunt instrument. If the Government are serious about changing behaviour—and their stated intention is that they are—this is not an appropriate structure; hence my call for the Government to consider other mechanisms and structures, such as road-user pricing, which is being investigated by the Department for Transport.

John Healey: Interestingly, my right hon. Friend the Paymaster General has just told me that the Liberals opposed road-user charging in Bristol, which is my right hon. Friend’s area. That is an interesting contradiction between the views that the party seems to take nationally and locally, but perhaps that is not terribly new. I say to the hon. Lady that, in the end, there is not one, single policy solution to the challenges that we face. Road-user charging may well help on one front, but it is not the single solution—the silver bullet—in policy terms.

George Young: The Financial Secretary made an interesting point a moment ago. Should we therefore assume that if the petrol price goes up by more than 6p between Budget day and 1 September, the Government will once again defer the increase?

John Healey: No, I was explaining the situation that we faced in 2005. I explained, in response to the hon. Member for Braintree, the difficult and complex balance of factors that we had to take into account and the judgment that we arrived at.
Finally, on the concerns raised by the hon. Members for Ludlow and for Wycombe about those sectors of the economy that are heavy users of red diesel or rebated fuel, I understand the concerns of the National Farmers Union, which I met before the Budget. We will examine the impact of the oil strategy with the NFU, as we will with other heavy using sectors. During the discussions, the NFU will have the opportunity, which I encourage it to use, to help us assess the strategy’s impact and put forward its view on what consideration the Government should give to future policy in the agricultural sector.
By way of warning, though, I say that it is not just the agricultural sector that is asking for preferential treatment. It is quite difficult to see a unique case for treating any of the sectors that make heavy use of rebated oil in a way that differentiates them significantly from other sectors.

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8

Road vehicles

Question proposed, That the clause stand part ofthe Bill.

John Healey: The Hydrocarbon Oil Duties Act 1979 requires road vehicles to use fuel on which the full rate of duty is charged. However, schedule 1 to the Act describes excepted vehicles, which are entitled to run on rebated gas oil, popularly known as red diesel. This clause will introduce a power to enable Her Majesty’s Treasury to amend schedule 1 by statutory instrument.
The schedule for excepted vehicles was first introduced in 1935. It has failed since then to keep pace with changes in technology and commercial practice. As far as we can tell, the last serious review of that policy took place in the 1960s. Vehicle technology and design continue to evolve, creating new types of vehicles that were simply not envisaged when the framework for schedule 1 and the excepted vehicle status were first drawn up. For that reason, vehicle owners, enforcement agencies, tribunals and the High Court have interpreted the schedule on a case-by-case basis, which has resulted in some inconsistency of approach. Consequently, it has become increasingly unclear why some types of vehicle should benefit from excepted vehicle status and others should not.
In December 2004, the Government issued a consultation document on changes to the excepted vehicles schedule. A summary of responses to that consultation was published in December 2005 alongside proposals for changing the schedule against a set of principles for establishing greater clarity and consistency.
The reasons for the powers in clause 8 to amend the schedule by Treasury order are threefold. First, they will make it easier to keep the schedule up to date so that we do not stifle developments in new engine design and technology. Secondly, they will enable the Government to respond more quickly when loopholes are identified to ensure the degree of consistency and fairness that we seek in the system. Thirdly, they will give the industry the opportunity to contribute fully to ensuring that changes in definitions fit their industry and do not have unintended regulatory consequences and impacts.
Industry associations with particular interests inthe matter have welcomed our approach almost unanimously. The Agricultural Engineers Association commented that it considers it a practical solution.The International Powered Access Federation, the Construction Plant-hire Association and others have also backed our approach. We have published in draft the Treasury order to amend the schedule, together with a partial regulatory impact assessment. Those have been circulated to Committee members and to associations and groups representing interests in the field.
In the long run, this valuable relief can remain viable only if it has clear rules based on consistent principles. The changes we have announced are aimed at restoring clarity and consistency to the schedule, and the power to add, amend or delete categories by Treasury order set out in clause 8 will ensure that the schedule continues to provide that clarity and consistency and continues to keep pace with modern developments.

Helen Goodman: As the Financial Secretary has just intimated, this is an important clause because it introduces a new power for the Treasury to amend the list of vehicles permitted to use red diesel. Those are clearly considerable powers so this debate is rather like the one we had on the provisions in clause 2 that gave the Treasury similarly considerable powers.
At that time, I asked the Minister about consultation because I wanted to be sure that it had occurred. He has just said that a consultation document has already been published and that groups with which the Treasury has held consultations are satisfied. That is important because it is quite a wide-ranging power and we shall not have the opportunity to add to or subtract from the list in primary legislation. None the less, we shall not oppose the clause, but I have a question for the Financial Secretary.
This morning, he sent round a draft of the statutory instrument in question, which is quite detailed, and it defines agricultural tractors, agricultural machine handlers, mobile cranes and road resurfacing vehicles. It will clearly be an important statutory instrument. In the letter to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) that accompanied it, the Financial Secretary said that he enclosed a partial regulatory impact assessment for the Committee. We would like to know when the regulatory impact assessment will be complete and when others will be able to see it.

Rob Marris: I have a brief question based on the draft regulations to which the hon. Gentleman referred. Why are road surfacing vehicles included? It seems to me that most roads built in the UK are built directly or indirectly at the behest of the Government and financed by them. It appears cursorily that there is a swings and roundabouts effect in this case. Either those vehicles are not exempt, and therefore the cost of building the road is higher because they have to pay more for fuel, or they are exempt, and the costs of building roads are somewhat lower.
In the first case, of course, the Government will be getting the money back through taxation because of higher fuel prices. However, that removes an incentive for operators and constructors of road surfacing vehicles to make them more fuel efficient because they get to run them on cheaper fuel. It may appear to be a matter of swings and roundabouts in the context of total Government expenditure, but whether it comes through a lower bid price for a road with lower fuel costs or a higher bid price with higher costs, environmentally it is not a good idea to lessen the incentive for those building and operating road surfacing vehicles by allowing them to pay red diesel prices rather than full prices.

Julia Goldsworthy: We welcome the proposals in principle as a way of overcoming abuse with regard to exempted vehicles and as a way of keeping up with the change in build, specification and technology of vehicles without referring back to primary legislation. They are also a way of overcoming adverse tribunal rulings that have highlighted the lack of clarity and ambiguity that exists in the current legislation.
Although I welcome the consultation that has taken place and I thank the Financial Secretary for the draft regulations, I am afraid that I did not receive the updated partial regulatory impact assessment and I wonder whether that is because it was not enclosed in the letter that I had, or because it went astray more widely. On that basis, I would like to ask the Minister how much of the annual fraud of £0.5 billion a year will be overcome by the changes, and will any additional resources be committed to enforcement measures to ensure that the level of fraud is reduced?

David Gauke: I merely have a brief question for the Financial Secretary. I notice that clause 8 is entitled “Road vehicles”, but my question is about the application of red diesel in respect of canal boats. The issue is of particular concern in my constituency because a major canal runs through it. Constituents have contacted me about the ongoing issue of red diesel, which I believe will no longer be available for canal boats. I seek further clarification, because there is nothing in the draft statutory instrument to which he referred in respect of that matter. It might be that as far as pleasure boats are concerned it is dealt with in a different regime, but I would be grateful for further clarification.

Stewart Hosie: I welcome the clause, not least, as the Financial Secretary said, because it will allow the Treasury to keep up to date, identify and close loopholes and allow the industry to engage to avoid unintended consequences. As I said, it might provide a mechanism to provide relief to certain other sectors and geographic areas. I am sure that that will be examined in the months and years ahead.
Like the hon. Member for Falmouth and Camborne, I think my partial regulatory impact assessment was put in a different envelope that has gone walkies. I would like to read it.

Colin Breed: Like the hon. Member for South-West Hertfordshire, who alluded to pleasure boats, I have received representations from a wider series of people who use red diesel in fishing boats and in boats where training is undertaken on one part and pleasure on another. Some activities qualify for red diesel and some do not and there are difficulties in trying to swap between the two. I am not sure whether certain things happened as part of that consultation exercise. Certainly pleasure craft, fishing boats and the marine industry as a whole have not been mentioned in the statutory instrument. Are the Government still considering that matter or have they reached a decision?

Brooks Newmark: In considering clause 8, I wanted briefly to reflect the concern of the road hauliers in my constituency. The issue is about a level playing field. The Freight Transport Association’s chief economist, Simon Chapman, said:
“Whether it is the cost of the diesel itself or the duty, every lp per litre on the price of diesel adds £140 million to industry’s overall operating costs. The Chancellor already takes £4.2 billion per year in diesel duty and lorry VED from heavy goods vehicles out of a total of £43.5 billion from all road users.”
Duty on diesel in the UK is 47p a litre, which contrasts with a European average of just 22p a litre.

Edward O'Hara: Order. I think that the hon. Gentleman is discussing the wrong clause. Clause 8 is about excepted vehicles.

Brooks Newmark: I am referring to duties.

Edward O'Hara: Order. If the hon. Gentleman would square the circle, I should be very pleased.

Brooks Newmark: I am attempting to do so. Substantial problems are generated for the domestic industry, which is in competition against foreign vehicles that are working in the UK using cheap European fuel. About one in eight of the heaviest vehicles on UK roads now comes from overseas. The level playing field—

Edward O'Hara: Order. The hon. Gentleman is out of order. Clause 8 is about excepted vehicles.

Brooks Newmark: I accept the Chairman’s charter.

John Healey: I am glad that we have had the opportunity to hear several contributions to this debate, because the provision is important. The excepted vehicles schedule and scheme is important.
I am grateful for the welcome that the hon. Member for Falmouth and Camborne gave to the clause. The partial RIA will be posted shortly on the HMRC website. I will make sure that members of the Committee receive a copy and that it is available in the Vote Office for other hon. Members to consult. The full regulatory impact assessment, about which the hon. Member for Wycombe asked me, is a draft order out for consultation in order to help us finalise the provision. It will be published alongside the instrument, in the summer.
I shall tackle the question of my hon. Friend the Member for Wolverhampton, South-West by referring back to the purpose of the clause, which is to reintroduce a clearer set of principles to underpin the eligibility set out in the schedule. Whether or not different categories of vehicle qualify for excepted vehicle status would be made clearer and more consistent.
The principle derives from the fact that the duty on oil raises funds for the Government. We spend that revenue in various ways, including the upkeep of the road network. It has long been accepted, and was behind the original introduction of the scheme, that vehicles used in areas, such as agriculture and construction, that make only incidental use of public roads that are maintained in that way, should not make the same contribution to the upkeep of that road infrastructure. For that reason, categories of vehicle that only incidentally use the main road network are classified as executive vehicles and therefore eligible to use red diesel at the heavily discounted duty rate in comparison with main road fuels.

Rob Marris: My hon. Friend said that the regime has been amended and tweaked, to use my words, since it was introduced in 1935 when, I would venture to say, environmental concerns about emissions from vehicles were not high on the agenda of any Government or individual. By road surfacing vehicles continuing to use red, rather than full price, diesel, an incentive is removed that ought to be there for operators of those vehicles to buy road lane vehicles that are more fuel efficient. It is precisely because it goes back to 1935 that the provision is a historic hangover that the Government ought to address.

John Healey: Once we start considering the environmental consequences of such matters, red diesel is a lot less clean than main road diesel. The types of vehicles involved in various facets of road construction need to be treated in the way that we propose under the schedule. Some are quite heavy users of the road fuel network, which is why some, according to our proposals, will not be eligible in the way that they have been in the past.
The principal case, which I have attempted to explain to the Committee, is the answer to the question of the hon. Member for Braintree. No one can say that road hauliers are anything other than heavy road users. There is no case and they have never been excepted road vehicles under the terms of schedule 1. Therefore, there is no case for their being treated as such even though they may wish to make other parallel arguments about the levels of fuel duty and the costs that they impose as part of their operations.
Finally, turning to the rather extraneous question that the hon. Members for South-West Hertfordshire and for South-East Cornwall (Mr. Breed) asked me, canal boats come under a separate regime. They are not excepted vehicles. However, they have a right to use red diesel rather than main road diesel paid at that rate. The reason is that the UK has a derogation from the energy products directive in the European Union. It allows private boat owners to continue to use red diesel—a derogation that is due to expire at the end of December of this year.
Following a long process of detailed discussion with many boating associations, and following detailed analysis within HMRC, we announced in the Budget that we believe that there is a strong case for arguing with the European Commission that we should havean extension of that derogation. The UK has the opportunity to submit an application for that extension. We confirmed in the Budget that it is our intention to do just that. Alongside the Budget, we published our first regulatory impact assessment, which we built in consultation with the boating associations. That sets out our case quite strongly. We will apply in that way for the UK’s derogation, which would allow private boat owners in the UK to continue to use red diesel, and which would mean that we did not incur the cost and the consequences that an ending of the permission would entail.
The hon. Member for South-East Cornwall talked about fishermen in his constituency. Just to be clear, commercial boats are not subject to the derogation. Commercial boat owners and users can use rebated gas oil or red diesel anyway, without the provision of that derogation, so they will not be affected by the European Commission’s ultimate decision on whether we will be entitled to extend the derogation that applies to private boat owners. I hope that that is helpful to the hon. Gentleman, and generally to Members who raised points about the clause. Given the hour, I hope that members of the Committee will allow clause 8 to stand part of the Bill.

Edward O'Hara: I allowed the debate to run on past7 o’clock because I could see that it was coming to a conclusion.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.
Further consideration adjourned.—[Mr. Heppell.]

Adjourned accordingly at two minutes pastSeven o’clock till Thursday 11 May at five minutes past Nine o’clock.